D3 Business Update March 2011

Tax preparation is proceeding efficiently. Neil Lefort, MBA, JD, CPA who recently joined our firm has been helping out immensely. As a reminder to everyone, we are required to electronically file (efile) everyone’s returns, so please do not forget to send back the efile authorization in the package you receive from us.

With warm weather fast approaching we are going to have our second annual “Bring Spring” event at the world renowned Morton Arboretum in Lisle on Saturday, May 14th, 2011. D3 Financial Counselors, will be covering the cost of admission, parking and will provide a box lunch. We just ask that you bring friends or family members whom you think would benefit from being introduced to us. Don’t worry this is not a sales event, it is just our way of asking you to help increase the awareness of the value that D3 Financial Counselors provides. Please save the date, May 14th, 2011, 11:00am until closing. We will be sending a formal invitation in early April.

Don was fortunate again to be invited to the Barron’s Winner Circle Conference, for the top independent advisors in the United States March 23rd-25th. Hopefully he will come back with many new ideas to apply to our risk controlled investment management style. Also, in case you missed it we have attached a copy of our full page feature in the March 14th issue of Forbes Magazine.

D3 Investment Outlook: Focusing on the Impact of the Japanese Crisis

We are all saddened by the horrific crisis in Japan. The financial question on everyone’s mind is what impact will this have on my investment portfolio. The simple answer is, that there are still too many potential scenarios to make any confident projections. We have been researching the situation and will summarize what we know.

The Japanese economy represents about 8 ½% of global gross domestic product (GDP). Their economy was projected to grow at 1.5% prior to the Tsunami. If that growth rate is reduced to 0%, the impact on global growth will be a little more than 1/10th of 1%. The area where most of the devastation occurred represents only 4% of Japan’s total GDP and about 2% of Japan’s total population. The industrial heartland of Japan has not been affected and Tokyo was not damaged.

The1995 Kobe earthquake in Japan knocked $100 billion off of Japan’s GDP. From a damage standpoint, this disaster should be lower except for the unknown impact of electrical shortages and a possible nuclear disaster. 30% of Japan’s power generation is from nuclear and 20% of that is now offline (6% total reduction). It is likely that Japan will have rolling blackouts through the county until at least April. The only historic perspective we have on a nuclear disaster is Chernobyl and Three Mile Island. We hope the Japanese can prevent a nuclear disaster.

Besides the negative perspective regarding nuclear energy, the largest impact from the Japanese disaster will likely be on global supply chains, interest rates and commodities (especially natural gas). Japan is a key cog in the global supply chain of tier 1 manufacturing processes (autos, chemicals, semi-conductors). Companies in these industries may not be able to satisfy global demand. Yen repatriation is a possibility, which would cause the yen to strengthen and have a negative impact on Japanese exporters.

Japan is also a key consumer of high end machine tools and technology systems. Sales of corporations serving Japanese manufacturers in these capacities may be impacted. Japanese citizens are also consumers of high end retail goods and are avid tourists. These industries may see some decline in marginal demand.

Because Japan will have to either borrow money or its citizen’s will save less money to rebuild, it likely that interest rates will go up (at least in Japan). Also due to the rebuilding, commodity prices, which had already been heading higher due to global demand growth will likely continue to go higher (perhaps not immediately but when the rebuilding begins in earnest). Last but not least, Japan is the largest importer of liquid natural gas and it is likely that this will be the energy source used to replace the lost nuclear electrical capacity. In conclusion, listening to JP Morgan’s, Japanese economist, the silver lining of the catastrophe is that deflation in Japan may finally come to an end.

D3 Investment Insight and Strategy :

As we shared in our last news letter, we had been focusing our efforts on rebalancing all clients’ portfolios to our new asset allocation models. We reduced international exposure and increased exposure to alternatives (primarily commodity oriented), and decreased our fixed income exposure in favor of dividend paying equities. With the world events unfolding as they have, we feel even more confident about these changes.

Given the Japanese crisis, we reviewed the level of direct Japanese exposure in all of our client’s international mutual fund investments. The largest Japanese exposure as of 2/28/11 was 18% and the average was 10%. We are comfortable that this level of direct exposure to Japan will not significantly impact anyone’s overall portfolio risk. The bigger risks are the potential secondary impacts we mentioned above.

Lastly…..

Each day that goes by reminds us that our job is to help manage uncertainty (a pretty heavy responsibility). By monitoring your investments daily we attempt to remove some of that uncertainty. As always thank you for your confidence in D3 Financial Counselors.